Commonwealth Numbered Regulations - Explanatory Statements

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CORPORATIONS AMENDMENT REGULATIONS 2004 (NO. 6) 2004 NO. 149

Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.

The Financial Services Reform Act 2001 (FSRA) commenced on 11 March 2002. It amended the Act to introduce a uniform licensing, conduct and disclosure regime for financial service providers.

The purpose of the Regulations is to support the reforms to the regulation of the financial services industry which were implemented in the FSRA and associated legislation.

The Regulations include amendments that:

•       provide relief from requirements in the Act to disclose in dollar terms where the Australian Securities and Investments Commission (ASIC) determines that it is not possible for compelling reasons;

•       afford transitional relief from the provisions in the Act until 1 January 2005;

•       ensure that ASIC has the ability to provide relief to classes of financial service providers;

•       provide ASIC with the additional operational flexibility to consider the provision of relief where there is an unreasonable burden on a regulated person or where such disclosure is not in the interests of the consumer;

•       rectify a potential loophole in the wording of the legislation to ensure that information presented on the subject items includes an amount (and is accordingly subject to the dollar disclosure provisions); and

•       confirm Parliament's intent that ASIC has the ability to make determinations granting relief in accordance with the Corporations Regulations 2001 (the Principal Regulations).

Further, the Regulations reinstate periodic statement disclosure obligations that were affected by a disallowance motion on 24 March 2004, and which was rescinded on 13 May 2004.

Details of the Regulations are set out in the Attachment.

Regulations 1 to 3 and Schedule 1 commence on 1 July 2004 and those in Schedule 2 on 1 January 2005. The differing commencement dates affords transitional relief to industry while permitting ASIC to commence making the relevant determinations.

ATTACHMENT

DETAILS OF THE CORPORATIONS AMENDMENT REGULATIONS 2004 (NO. 6)

Regulation 1 provides that the name of the Regulations is the Corporations Amendment Regulations 2004 (No. 6).

Regulation 2 provides that regulations 1 to 3 and Schedule 1 commence on 1 July 2004 and those in Schedule 2 on 1 January 2005.

Regulation 3 provides that Schedules 1 and 2 of the Regulations amend the Corporations Regulations 2001 (the Principal Regulations), as amended by Corporations Amendment Regulations 2003 (No.8), recognising that these latter regulations do not come into effect until 1 July 2004.

Schedule 1 - Amendments commencing on 1 July 2004

Items [1], [6] and [11] - Regulations 7.7.10A, 7.9.15A and subregulation 7.9.74A(1) & (2)

The regulations provide that the dollar disclosure obligations in the Corporations Act 2001 apply generally after 1 January 2005, subject to any determination(s) made by the Australian Securities and Investments Commission (ASIC).

The regulations provide transitional relief from the dollar disclosure obligations in line with the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services (PJC) report into Corporations Amendment Regulations 2003 (Batch 6); Corporations Amendment Regulations 2003 (Batch 7) and draft Corporations Amendment Regulations 2004 (Batch 8).

The transitional period ensures that those regulated persons that are not able to comply with the dollar disclosure requirement do not face a legal obligation which they cannot fulfil. However, to the extent that regulated persons are in a position to comply before that time, it would be in the interests of consumers and consistent with the intended operation of the legislation for them to do so.

The regulations modify the operation of the following sections within the Act to address a potential loophole that may have allowed regulated persons to not disclose information in dollars in the first instance, including:

•       Paragraph 947B(2)(h);

•       Paragraph 947C(2)(i);

•       Paragraph 947D(2)(d);

•       Paragraph 1013D(1)(m); and

•       Subsection 1017D(5A).

The modifications clarify that ASIC has the ability to make determinations on whether information may be disclosed in a form other than dollars and that the regulations provide the guidelines for those determinations.

Items [2], [4], [5], [6], [12] and [13] - Subregulations 7.7.11(2) and (3), 7.7.12(2) and (3), regulations 7.7.13A and 7.9.15B, subregulations 7.9.75(3)-(6) and regulation 7.9.75C

The regulations provide ASIC with the ability to determine that 'for a compelling reason, it is not possible' for the regulated person to disclose information in dollar terms.

If it is not possible to provide the amount in dollar terms the regulations require the disclosure to be provided in percentage terms. If presentation as a percentage is not possible, then a description of how the item is determined is provided. An exception to a description is provided for periodic statements where parties are advised where to obtain information, on the basis that provision of information in this form is better provided through other forms such as a Product Disclosure Statement (PDS) rather than unduly complicating statements that are intended to summarise details of a person's investment holding during the period.

Worked examples are required to be provided in conjunction with disclosure of items as percentages or via other descriptions, unless inappropriate, in order to facilitate an investor's ability to comprehend the material provided.

The criterion, under which ASIC may make its determination, requires very strong arguments to support a party's contention that disclosure in dollars is not possible. It is not considered that this criterion permits ASIC to take into consideration a range of supporting compliance considerations. For example, as the test relies on whether it is possible to disclose (or not) it is arguable that where theoretically possible a regulated person is required to comply even where there was a resulting significant financial burden imposed (even to the extent of causing bankruptcy). The compelling reasons needs to be overwhelming for the party for ASIC to allow them to avoid the disclosure obligation.

However, information regarding a range of intangible and unquantifiable items, may still be able to be considered by ASIC under this criterion.

The regulations require such ASIC determinations to be in writing, which under the operation of section 46 of the Acts Interpretations Act 1901 and associated case law permits ASIC to provide relief on a class basis.

Items [3], [5], [6], [11] & [13] - Regulations 7.7.11B, 7.7.13, 7.7.13B, 7.9.15C, subregulations 7.9.74A(3) to (5) and regulation 7.9.75D

The regulations provide ASIC with the ability to determine that disclosure should occur in terms other than dollars where there is an unreasonable burden on a regulated person (including for a period of time) or such disclosure is not be in the interests of the consumer.

In those circumstances the regulations require the disclosure of information to be in percentage terms. Again if presentation as a percentage is subject to similar concerns, then a description of how the item is determined must be provided (excepting for periodic statements).

Worked examples are required to be provided in conjunction with disclosure of items as percentages or via other descriptions, unless inappropriate, in order to facilitate investors' ability to comprehend the material provided.

These regulations enable ASIC to consider a range of compliance issues and costs associated with the provision of information in dollar terms. For example, the extent to which a matter constitutes an unreasonable burden may include consideration of the necessary systems changes required to collate the information.

The regulations also permit ASIC to determine whether relief was required for a limited time where there was an unreasonable burden to the regulated person. This may provide ASIC with the ability to determine whether there remain any outstanding transitional issues that need to be addressed after 1 January 2005. This is especially required as ASIC will make an array of determinations on either a class or individual basis, within a limited 6 month timeframe.

The regulations require such ASIC determinations to be in writing, which under the Acts Interpretations Act 1901 permits ASIC to provide relief on a class basis.

Items [7] & [8] - Subregulations 7.9.19(1) & (2)

The regulations address an unintended consequence from the combination of the disallowance Item [7] of Schedule 3 of Corporations Amendment Regulations 2003 (No.8) on 24 March 2004 and not disallowing Item [6] at the same time.

Without correction, disclosure requirements relating to withdrawal benefits for superannuation fund periodic statements would not have applied for reporting periods commencing from 1 July 2004.

Item [7] removes the inappropriate restriction on the operation of the disclosure requirements from 1 July 2004, while the amendment to subregulation 7.9.19(2) redefines the correct application of the regulation.

Items [9] & [10] - Paragraphs 7.9.72(b) & (c)

The regulations ensure that the dollar disclosure requirements under subsection 1017D(5A) applies to the disclosure of information in the periodic statements of superannuation fund members and retirement savings account holders.

Schedule 2 - Amendments

Items [1] to [5] - Regulations 7.9.19, 7.9.19A, 7.9.19B, 7.9.20, 7.9.20A & 7.9.20B

The amendments to regulations 7.9.19 and 7.9.20, and the introduction of regulation 7.9.19A enhance the existing requirement to disclose information about the amount of a 'withdrawal benefit' or other significant benefits. (A withdrawal benefit is the amount a fund would provide to a member for the voluntary cessation of their interest in the superannuation fund at the end of a period.)

The amendments require further disclosure of the nature of any withdrawal or significant benefits, including informing the product holder:

•       that the withdrawal benefit is an indicative estimate that may vary from the actual benefit provided; and

•       how to access further information.

Through the other regulations presentation for the disclosure of amounts in dollar terms apply as outlined above in relation to the amendments to regulations contained in Schedule 1. That is, if it is not possible to provide the amount in dollar terms the regulations require the disclosure to be provided in percentage terms. If presentation as a percentage is not possible, then a description of how the item is determined is provided.

Items [6], [7] & [8] - Amendments to regulation 7.9.75

The amendments overcome any uncertainty in relation to the disclosure of amounts paid in respect of a financial product from a common fund.

The requirement to disclose amounts paid from a common fund was previously subject to the interpretation that it permitted disclosure of the total amount applicable to a common fund rather than an amount related to the product holder's interest. The amendments contained in paragraph 7.9.75(1)(b) require the disclosure of common fund amounts in a form that can be related to the product holder.

The ability to disclose a proportion rather than an actual amount is consistent with the nature of pooled investment products.

The requirement to disclose amounts paid by a product holder during a period is also clarified by the inclusion of subregulation 7.9.75(2) to be consistent with definitions of amounts payable contained in section 1013D of the Act.

Further, the requirement to disclose the ability to obtain further information is enhanced in paragraph 7.9.75(1)(d), by ensuring that the means by which a product holder can gain access to that information is included in product disclosure statements.

REGULATION IMPACT STATEMENT

DISCLOSURE OF AMOUNTS IN DOLLAR TERMS - PROPOSED CORPORATIONS REGULATIONS 7.7.11, 7.7.11B, 7.7.12, 7.7.13, 7.7.13A & B, 7.9.15B & C, 7.9.74A, 7.9.75, 7.9.75C & D

Issue

The Financial Services Reform Act 2001 (FSR Act), which commenced on 11 March 2002, introduced a uniform disclosure and licensing regime to the financial services industry. The FSR Act is intended to provide a strengthened and more consistent regulatory regime to promote the confident and informed use by consumers of financial services and markets.

The FSR Act requires a range of disclosure documents, including Statements of Advice, Product Disclosure Statements and periodic statements to include details of benefits, fees and charges, and other payments - information necessary for retail investors to make informed investment decisions and understand their holdings of financial products.

Regulations contained in Schedule 3 of Corporations Amendment Regulations 2003 (No.8) were made to address a lack of clarity associated with various provisions of, and regulations under, the FSR Act which require parties to present 'information about' the above mentioned items within disclosure documents. It was considered that the earlier 'information about' requirements may potentially have resulted in the information being provided in a form that was sub-optimal from a consumer comprehension viewpoint. The regulations were to commence on 1 July 2004.

The regulations explicitly required items that can be disclosed as amounts under the FSRA to be displayed as a dollar figure. If it was not reasonably practicable to provide the amount in dollar terms then the item was to be disclosed in percentage terms. If presentation as a percentage was not reasonably practicable, then a description (as appropriate) of how the item is determined was to be provided. Worked examples were also required to be provided.

Those regulations were subsequently overridden by requirements introduced with the Financial Services Reform Amendment Act 2003 on 5 December 2003. The requirements within the Act (that are to commence on 1 July 2004) require the disclosure of amounts in dollar terms unless in accordance with regulations. At that time, the Senate agreed to promulgate underlying regulations that utilised a criterion based on the Australian Securities and Investments Commission (ASIC) making a determination that it was 'not possible for a compelling reason'.

The Parliament requires a higher test than the original 'reasonably practicable' criterion be used. However, the extent of application of any test is limited by operational considerations affecting the information provider and weighed against the benefits to the consumer in the application of these disclosure obligations.

Objective

To provide for the effective and appropriate disclosure of information relating to financial products and services.Options

The following options have been considered:

a)       Do nothing - Make no regulations to underlie the requirements in the Corporations Act

This option would have the requirements in the Act to disclose information about a relevant item as a dollar figure in all circumstances.

b)       Introduce Corporations Amendment Regulations using the criterion proposed in the Senate

This option would have the proposed 'not possible for a compelling reason' criterion as the only means for determining relief from the obligation to disclose in dollar terms. ASIC would be required to specifically determine the circumstances (on a class or individual basis) within the not possible for a compelling reason constraint.

The regulatory approach would be structurally consistent with the operation of previous requirements from Schedule 3 of Corporations Amendment Regulations 2003 (No.8) in terms of its cascading disclosure requirements. The regulations explicitly require items that can be disclosed as amounts under the FSRA to be displayed in dollar terms in the first instance. The secondary form would be to disclose the information in percentage terms. The final permissible form would be to provide a description (as appropriate) of how the item is determined. Worked examples would also be presented to aid consumer comprehension in relation to presentation of percentages and other descriptive forms.

c) Introduce Corporations Amendment Regulations that provide for additional relief criteria

Regulations could be made to require industry to disclose items in dollar terms using the criterion for relief under Option (b) and additional criteria (for example, to provide a transitional period). Specifically, providing additional relief from that under the not possible for a compelling reason criterion to disclose in dollar terms is necessary in relation to:

allowing consideration of whether the disclosure obligations within the Act impose an unreasonable burden on the regulated person or is not in the interests of the consumer; and

consideration of transitional needs, including a transitional period until 1 January 2005 and affording ASIC the ability to provide relief for specified periods.

The additional relief criteria are consistent with the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services.

The requirement for an ASIC determination in relation to the extended criteria is consistent with the application of the 'not possible for compelling reasons' and the intention of Parliament for ASIC to be involved in the process.

The use of regulations would provide a consistent regulatory form of relief with that agreed by the Senate and moreover, is in line with Parliament's intent given that the requirements in the Act allow for relief to be provided through regulations.

Impact analysis

The financial services and product disclosure regimes under the FSR Act affect a broad range of businesses within the financial services sector and their associated consumers. The financial services sector includes:

•       depository entities (such as banks, building societies and credit co-operatives);

•       insurance entities and pension funds (that is, life insurance, general insurance, superannuation funds); and

•       other financial entities, including financial intermediaries (such as financial unit trusts and investment companies) and financial auxiliaries (such as financial advisers).

a) Do nothing This option would require the giving of information in relation to financial products and services as an amount in dollar terms in all instances. This would include instances where it would be impossible to do so - for example if a charge was dependent on a variable or unpredictable future event the law would require it to be quantified in dollar terms at this point in time.

As it may also not be possible to reliably quantify amounts at the current time such disclosures would potentially be in conflict with other requirements of the Corporations Act (eg, prohibits on misleading statements).

The disclosure requirements in the Act apply from 1 July 2004 and the industry has been uncertain as to whether or not there would be regulations to provide circumstances for relief (and then in what form) from the requirements in the Act. Accordingly, there may not have been sufficient time for industry participants to satisfy the new requirements. This may result in a general inability for industry to comply with the legislated requirements.

Moreover this option is not consistent with the intentions of Parliament which are specifically indicated by the Government's commitment to produce regulations to underlie the requirements in the Act.

Specific Costs

Industry would be required to inject a large amount of resources to meet the almost immediate deadline of 1 July 2004 for the introduction of a blanket requirement. This would entail the wholesale scrapping and replacement of existing disclosure documentation and a potential array of system changes to make the necessary calculations. The parties would seek to recover the cost of these resources through higher charges to consumers.

Moreover it would be unlikely that industry, or at least many individual participants, would even be able meet that timetable. As such, the majority of regulated persons would be subject to a range of criminal and civil penalties if they continued to offer financial products and services. The alternative would be for industry participants to withdraw from the market.

Moreover, a do nothing approach would still result in the imposition of disclosure obligations where it is not even possible to quantify amounts.

b) Introduce Corporations Amendment Regulations using the criterion proposed in the Senate

This option would have the requirements to disclose in dollar terms relieved based on the 'not possible for a compelling reason' criterion. This would remove immediate concerns associated with the imposition of a legal obligation under Option (a) that did not even account for the concept of possibility.

The approach is also consistent with the intentions of Parliament and the commitment provided by the Government on 5 December 2003.

However, subject to determining the threshold point and providing relief from the obligation to disclose in dollar terms, there is a question of determining the extent of any relief to balance the interests of the providers of the information and the interests of the consumer.

The 'not possible for a compelling reason' criterion does not account for those circumstances where the costs of compliance outweigh the potential benefits to the consumer. For example, as the test relies on whether it is possible to disclose (or not) it is arguable that where theoretically possible a regulated person would be required to comply even where there was a resulting significant financial burden imposed (even to the extent of causing bankruptcy). The compelling reasons would need to be overwhelming for the party for ASIC to allow them to avoid the disclosure obligation.

Further, this option does not take account of the need for industry to have an acceptable transitional period in which to deal with the change to a stricter test from the earlier proposed 'not reasonably practicable'.

Specific Costs

As per Option (a), industry would still be required to inject large amounts of resources to meet the almost immediate deadline of 1 July 2004 for the introduction of a stricter test than was originally provided under Corporations Amendment Regulations 2003 (No.8). Again these costs may be recovered through higher charges to consumers.

Without additional transitional relief it would be unlikely that industry, or at least many individual particularly, would be able to meet that timetable given the necessary systems and documentary changes.

There will be systems costs for ASIC and industry associated with the need for applications for class order or individual relief from the disclosure requirements. However, it was the intention of Parliament for ASIC to be an integral part in the process of determination.

Greater detail of potential costs is not possible to be ascertained prior to publication of ASIC determinations.

c) Introduce Corporations Amendment Regulations that provide for additional relief criteria to that under Option (b)

This option would provide ASIC with additional flexibility from that under Option (b) to determine a range of circumstances when it may not be appropriate or unreasonable to provide information in dollar terms. Simply, it permits that ASIC to consider a broader range of issues, in balancing the needs.

The additional circumstances (that is, unreasonable burden, consumer interest and transitional) were recognised as necessary elements to be considered in the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services (PJC).

Specific Costs

The potential burden associated with any amendments to existing industry systems would be further moderated from that under Option (b) through the delayed commencement of the provisions until 1 January 2005. In addition, ASIC will have the ability to address any outstanding transitional or other issues (both on a class and individual basis).

The proposed relief criteria is by definition a tighter test than 'reasonably practicable', in particular with regard to application outside of the transitional and will result in the expedition of disclosure in dollar terms from that provided under the previously proposed criterion. Accordingly, industry will experience costs associated with the necessary systems changes to calculate the amounts and meet the stricter test.

There will be systems costs for ASIC and industry associated with the need for applications for class order or individual relief from the disclosure requirements. However, it is apparent that it was the intention of Parliament for ASIC to be an integral part in the process of determination of relief from the subject provisions of the Corporations Act.

Further information on costs is not available prior to publication of ASIC determinations.

Consultation

Draft amendment regulations, that became Corporations Amendment Regulations 2003 (No.8), relating to the disclosure of dollar amounts were released for public consultation on the Treasury website on two occasions, 12 March 2003 and 27 August 2003. The Ministerial Council for Corporations has on both occasions been provided with copies of the proposed amendments.

The Association of Superannuation Funds of Australia (ASFA) support the proposed introduction of dollar-based disclosure as proposed in the draft regulations. ASFA noted that consumer testing they had undertaken has found consumers better understand dollar-based disclosure as compared with percentages.

A version of the proposed dollar disclosure regulations consistent with the commitments given in the Senate on 5 December 2004 and Option (b) was released for public comment on 7 January 2004 and subject to an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services (PJC). Submissions received in both forums generally sought greater relief (transitional or otherwise) to account for a broad array of operational issues. This included submissions from the Investment and Financial Services Association expressing operational concerns (citing issues with fees calculated as percentages and fees that have a negotiable range) and the need for transitional relief. The Australian Bankers' Association noted the potential costs, disruptions and possible market implications that could exceed consumer benefits under the proposed regulations. These views were supported by the recommendations of the PJC.

The current version of the draft regulations was released for public comment on 2 June 2004. Comments received, while supportive of disclosure in dollar terms and the general operation of the obligations, raised concerns over the requirement for ASIC to make determinations over all the instances affected by the dollar disclosure provisions. Moreover submissions, such as that provided by the Investment and Financial Services Association, discussed the circumstances under which ASIC may seek to provide relief from the disclosure obligations in the Corporations Act.

Conclusion and recommended option

Option (c) is recommended. The extent of relief afforded under this option represents an effective and appropriate means of addressing operational concerns related to the disclosure of items in dollar terms under the FSR Act.

Moreover the proposed relief under this option reflects a appropriate balance of a regulated person's ability to provide the information against the consumer benefit.

Implementation & review

To allow sufficient time for transition, and ASIC to prepare the necessary determinations, it is proposed that these requirements will only apply after 1 January 2005.

DISCLOSING INFORMATION ON SUPERANNUATION BENEFITS - AMENDED CORPORATIONS REGULATIONS 7.9.19, 7.9.19A & B, 7.9.20 AND 7.9.20A & B.

This Regulation Impact Statement was previously tabled with Corporations Amendment Regulations 2003 (No.8). It has merely been updated to reflect events since that time and the new commencement date.

Issue

The Financial Services Reform Act 2001 (FSR Act), which commenced on 11 March 2002, introduced a uniform disclosure and licensing regime to the financial services industry.

Periodic statements for financial products that contain an investment component (such as superannuation and managed funds) provide holders of financial products with regular information on details, such as, a summary of transactions during the period and the termination of the investment at the end of the period. This information is the only regular information received by the holder of the financial product and is vital to keeping the holder informed of the position of the investment.

Under Corporations Regulations 7.9.19 and 7.9.20, periodic statements for superannuation fund members are specifically required to inform members of the amount of a 'withdrawal benefit' and details of other significant benefits for their interest. Such information is necessary for a superannuation fund member making a decision whether or not to retain their interest in the fund. However, superannuation funds are not specifically required by existing Corporations Regulations to disclose material that would aid a member's comprehension of the nature and composition of such benefits.

The FSR Act is intended to provide a broad regulatory disclosure regime to promote better informed consumers and hence a more competitive market place.

Regulatory requirements the same in substance were contained in Schedule 3 of Corporations Amendment Regulations 2003 (No.8) but were included in a disallowance of items within that schedule that took place on 24 March 2004. The proposed regulations reinstate the effect of the disallowed regulations.The disallowance motion was rescinded on 13 May 2004.

Objectives

To enhance existing disclosure obligations within periodic statements relating to the superannuation fund benefits. In particular, through disclosure of what withdrawal benefits and any other significant benefits comprise (rather than just stipulating an amount).

Options

a)       Do nothing

Under this option, regulations 7.9.19 and 7.9.20 would be maintained as they already require some disclosure of the amount of withdrawal benefits and other significant termination benefits.

b)        Guidance from Australian Securities and Investments Commission (ASIC)

This option would involve ASIC providing greater guidance on the operation of the existing regulations through ASIC publications such as Policy Statements and Frequently Asked Questions.

c)        Amend Corporations Regulations

Corporations regulations 7.9.19 and 7.9.20 provide the existing requirements to disclose information about the amount of termination benefits from the holding of superannuation and retirement savings account products. The termination benefits include such items as 'withdrawal benefits' - being the amount a fund would provide to a member for the voluntary cessation of their interest in the superannuation fund at the end of a period - or disability benefits.

Those regulations could be amended to reflect the Government's expectation of what constitutes relevant information and ensure that it is disclosed in a manner that is meaningful and which promotes consumer understanding.

Impact analysis

Consistent with the Government's general approach to the regulation of self-managed superannuation funds (SMSF), SMSF will not be subject to the proposed increase in specification of periodic statement reporting requirements. Corporations regulations 7.9.19 and 7.9.20 currently exclude SMSF.

Accordingly, those sectors of the superannuation industry potentially affected by any proposed greater specification of periodic statement reporting requirements, would incorporate approximately 2472 superannuation funds with assets of approximately $415 billion and 24.7 million accounts[1].

a)       Do nothing

The Government has determined that the current information requirements prescribed by Corporations regulations 7.9.19 and 7.9.20 are not optimal, as they do not provide sufficient information to investors. Accordingly, the option not to alter the current regulations 7.9.19 and 7.9.20 would not be considered consistent with the requirements of subsection 1017D(4) of the Act which requires the provision of information that is reasonably believed for the holder of the product to understand their investment.

Costs

This option would incur nil costs to industry, however consumers may require additional financial services (potentially at a cost) in order to fully understand the nature of any superannuation benefits.

b) Guidance from ASIC

This option would be more flexible in operation than other legislative instruments, however policy guidance is not binding or enforceable in a court of law.

Costs

The proposed specification of additional information may require system changes and modification of periodic statement templates by industry participants who followed ASIC's guidance to supply the required information.

c)       Amend Corporations Regulations

The proposed regulations reflect the Government's expectation that the relevant information is disclosed in a manner that is meaningful and which promotes consumer understanding. By putting these requirements into law, there is also greater certainty and provides ASIC with a firmer basis on which to provide guidance and enforce the provisions through reliance on the regulations.

Proposed amendments to regulations 7.9.19A and 7.9.20 are intended to enhance the existing requirement to disclose information about the amount of termination benefits from the holding of superannuation and retirement savings account products. In particular, they require:

•       an indication of the amount of any fees and charges payable that would be associated with estimated termination benefits at the end of the reporting period; and

•       informing the product holder that the amount of benefits described is a notional amount and may be subject to change; and

•       the advising of the product holder of the availability of further information.

The regulation amendments proposed increase consumer protection in relation to the superannuation industry, through clarifying what is believed to be necessary for a product holder to understand their investment. There is general support for the principle of providing members with information on fees and penalties upon exiting a fund. This information will assist in the quality of member decision-making.

It is intended that clarifying the disclosure requirements for costs associated with leaving a superannuation fund will present holders with a more accurate indication of their account and provide an easier comparison if they wish to consider changing funds. In addition, the inclusion of further descriptive statements will ensure that product holders have a better understanding of the nature of the amounts presented in the periodic statement.

Requiring the presentation of this information is consistent with the purpose of periodic statements, which is to provide investors with regular information to enable them to understand their investment and its performance.

Costs

As per Option (b), this proposal may affect industry system requirements and existing statement templates.

However, information regarding applicable fees and charges may already be calculated in determining a figure for any end benefits. Further, the disclosure of those components is subject to a reasonably practicable criterion, which may permit alternate arrangements to access information where a regulated person is not able to supply the necessary details.

Consultation

Consultations primarily relate to the earlier requirements contained in Schedule 3 of Corporations Amendment Regulations 2003 (No.8). Therein draft regulations were released for public consultation on the Treasury website on two occasions, 12 March 2003 and 27 August 2003. The Ministerial Council for Corporations has been provided with draft copies of the regulations.

The draft of 12 March 2003 was widely criticised by industry in relation to their ability to implement and the vagueness of its operation.

The revised August draft was not subject to such criticism by industry bodies. Further, the Association of Superannuation Funds of Australia (ASFA) support providing superannuation fund members with information that will assist the quality of decision making. In particular, ASFA indicated that superannuation fund members should be alerted to the impact of exit and withdrawal fees on received benefits through the periodic statement.

Draft regulations for reinstatement of the requirements following the disallowance were released on 2 June 2005. Only one submission was received, from Superpartners Pty Ltd, and which suggested there was no additional benefit from the requirements in the periodic statement. Though an alternative of including the information in the annual report was suggested.

Conclusion and recommended option

The preferred option is option c), amend the Corporations Regulations to provide for increased disclosure, which will result in more effective information being provided in relation to the impact of fees and charges when a person leaves a fund and the nature of disclosed termination values. The provision of the information within a periodic statement is considered to be timely to any possible decision to dispose of an interest and more closely aligned with the provision of the information.

It is considered that the current regulations do not provide sufficient clarity as to the content required within a periodic statement for the requirements in the Act pertaining to a product holder's knowledge of their investment to be satisfied.

Implementation & review

To allow sufficient time for transition to these amended requirements, it is proposed that these requirements apply from 1 January 2005.

The amending regulations enhance the operation of provisions existing in the FSR Act, accordingly, no specific review of the regulations is intended.